Make good: The landlord’s sting in the lease tail

by Rodney Timm
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Make good negotiations are a complex procedure for property manager and tenant alike.

Make good negotiations are a complex process for landlords and tenants alike. RODNEY TIMM reveals how you can make the most of them.

Make good negotiations at the end of leases are akin to alimony disputes at the end of marriages. For landlords, they mark the opportunity to avenge tenancy excesses that weren’t considered rationally during the lease relationship. Tenants, on the other hand, seldom have the wide range of skills and experience in lease termination required to understand the many intricate obligations that come with lease termination. Furthermore, they often don’t pay attention to these obligations until it’s time to follow through.

How make good is negotiated

The principles behind make good obligations are simple and sound: the tenant leases generic premises from the landlord, customises it to meet their specific needs, and is then required to return it to the landlord in its generic form at the end of the lease. The landlord is then able to decide what additional works may be required to competitively market the premises, excepting fair wear and tear.

Leases often have ‘standard’ make good clauses – unthreatening and ambiguously worded. It’s at this juncture that they are most willing to negotiate the make good clause, yet tenants tend to accept it without question, focusing instead on lease commitments and early cash flows.

Cunning landlords know this, and exploit it to their benefit. They will rub their hands in glee as the tenant requests approval for specialist fit-outs such as executive lavatories and kitchens, knowing that the long-term result will be increased make good costs.

How make good is exploited

There are two key components in the negotiation and exploitation of make good obligations. The first is preparation, structuring the clause, and creating a dossier of evidence. The second component is relevant at the tail of a lease when landlords work out negotiating tactics and exploiting cost estimates.

Astute landlords understand that clause structure and the compiling of evidence at the commencement of leases – the ante-nuptial part of the process – is crucial. In contrast, tenants tend not to collect evidence. Their memories fade, and even within the definition of fair wear and tear, the ability to exploit their position knowing that tenants aren’t likely to have the proof necessary to contend the landlord’s position. In addition, during the lease negotiation the landlords might slip a list of aggressive redecoration obligations – new carpets, the repainting of walls, or replacement of air-conditioning units that will override the fair wear and tear provisions.

Once it becomes obvious that a tenant will be leaving, the landlord will turn their focus to negotiation tactics. Aware that the tenant will be distracted with plans for their new premises, they will find the most suitable way to press make good obligations. The clock is ticking, and tenants are left with two choices: make good the premises, or pay the landlord a cash settlement. The longer the negotiations last, the less time the tenant will have to undertake the work, making a cash settlement more likely.

The settlement will be based on the landlord’s cost estimate of the works which, when prepared by make good professionals, is likely to be very high. Costs might include a range of imaginative cost line items including base building works, site preparations, and ‘fat’ project management fees.

In response to the thought of such an exorbitant outlay, tenants may choose to undertake the work themselves. If this is the case, tenants must be aware that the landlord’s appointed expert will probably be present at the formal hand-back. They will arrive with a detailed dossier of evidence, ready to support the landlord’s position and pounce on even the broadest shortcomings in the work. Remember that make good is deemed not to be complete until all defects are rectified; the tenant’s obligation rolls on, costing significantly more than the initial proposed cash settlement.

Make good preparations and management

For landlords and tenants, make good management is all about adequate planning at both the beginning and conclusion of a lease. Preparation is most effective during the lease negotiations, as tenants are focused on their exciting new premises, not the details or financial impact that future make good obligations may entail, and landlords are focused on closing the lease deal.

Next, the astute landlords and tenants will collect evidence. Detailed photographic records should be produced, and a professional appointed to prepare a condition report. The more evidence, the better; it’s an efficient mechanism to maximise or minimise the make good obligations, especially if one party doesn’t retain their own records.

During the tenant’s occupancy period, landlords will be mindful of make good obligations in relation to fit-out changes submitted to them for approval. More, they will make sure the make good obligations are entrenched. Landlords know that by the time they apply for a fit-out, tenants are usually desperate to make the change, ignoring additional make good obligations and costs.

At the end of the lease, when tenants are questioning whether they will stay or leave the premises and start asking about their make good obligations, landlords will be less than expeditious in their response. The less time left for a tenant to make a decision, the less likely that they will move. If they do move, it becomes significantly more probable that they will choose to make a cash settlement rather than undertaking the work themselves, without having adequate time to fulfill their make good obligations.

In the end, the upside of make good obligations for landlords is enormous if they are prepared, but a tenant is not.

 

Image: 123RF’s Ngampol Thongsai, © 123RF.com

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